What happens to joint or co-signed loans or leases when you file bankruptcy?

If you have any any joint or co-signed loans or leases, typically your liability for them will be cleared when you file bankruptcy, if the debt is of type that can be discharged. For example, if you co-signed a student loan, your liability for the student loan will not be discharged; but if you co-signed for a car loan or credit card, this liability could be wiped out.

The other person on the loan (known as the “codebtor”) would remain liable. The creditors’ efforts to collect from him or her may be slowed down because you filed bankruptcy, and the creditor may even need to get permission from the court to go after codebtor, but ultimately the codebtor is still liable.

Although often you don’t have to pay for co-signed loans when you file bankruptcy, you may decide to do it for family or economic reasons. For example, let’s say you co-signed a car loan for your child or spouse, and the loan has 20% APR over 7 years. If you file a Chapter 13 case, your plan could include payment for this car loan at 5% interest over 5 years – if you wish to be involved, and feel comfortable that it would be financially doable for you.

Lastly, if you are considering filing bankruptcy, take note of any joint liabilities or co-signed loans or leases, and be prepared to provide details about them to the court. People sometimes tend to overlook these liabilities, especially if the other person is making the payments. It is, however, important to include and properly present this information to ensure that your bankruptcy case is successful, and that it’s clear to the court, the codebtor and the involved creditor what you are planning to do with respect to these debts.